Market Structure and Firms' R & D Behavior

Abstract

IN recent years there has been much theoretical discussion and empirical investigation of the factors underlying firms' research and development activities. The relationship between market structure and an industry's R & D activities in particular continues to be the subject of intense debate. This paper attempts to clarify and extend the state of knowledge in this area. Part II outlines the state of the debate concerning the incentive to invent under alternative market structures, emphasizing several unsatisfactory features of the controversy which reduce considerably the practical relevance of the conclusions reached by the respective contributors. Notable in this connection is the implicit assumption that invention itself is monopolized, and the failure adequately to take account of the interdependence which exists between firms' output and R & D decisions. Part III develops a comprehensive analytical framework which shows clearly the nature of the relationship between firms' output and R & D decisions, and the multidimensional nature of the expectations regarding rivals' reactions which are relevant in determining R & D behavior. Part IV interprets the results of recent empirical studies of the determinants of firms' R & D behavior in the light of this analytical framework.

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